What’s next? Helicopter money? – Gregor Logan

Greece is facing debt repayment deadlines again and so is ‘renegotiating its debts’ with the EU (a euphemism for borrowing even more). The last time this happened in July 2012 Mario Draghi, president of the European Central Bank, said in an unscripted off the cuff remark “within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”. These few words have been credited with saving the Euro, or at least prolonging its agony, as confidence returned to financial markets and the cost of debt in Greece, Italy and Spain fell dramatically, allowing Greece to roll over its debt.

The world relies on ever more experimental monetary policy because after the Global Financial Crisis in 2008 governments of the developed world had accumulated too high levels of debt and ongoing deficits to introduce classical Keynesian reflationary fiscal policies of tax reduction and higher government spending.

Since the early 1990’s central banks have been tasked with controlling inflation as their primary policy aim. This has been interpreted as 2% is good, but above or below 2% requires monetary contraction or expansion. When zero interest rates proved insufficient to generate more than anaemic growth and hence the required 2% inflation, the central bankers introduced further monetary stimulus in the form of bond buy back’s, now termed Quantitative Easing or QE. First introduced in the US, it was followed with varying levels of speed and enthusiasm by the UK, Japan and Europe.

This has enabled the global economy to enjoy so-so economic growth of 2% or so, but has only been possible because consumers and corporates have returned to spending tomorrow’s income today and in the process run up considerably larger debts than before the crisis; debts which in many cases are only affordable because of the prevailing very low interest rates. It has also fuelled the much debated rise in asset prices and consequent divergence in wealth.

Many think all this is simply storing up a bigger crisis for the future. Nor has it addressed the major imbalances in the global economy — characterised as the developing world exporting cheap goods and low paid workers to the developed world and in the process deflating consumer prices, lowering the cost of borrowing and encouraging the propensity for Western consumers to borrow and spend.

In Japan, the central bank has done so much QE there are fears they may have run out of ammunition. In the US, Donald Trump has said the previously unthinkable by a politician and suggested the Government should pay back its national debt with discounts. You might write that off as another attention seeking maverick quote, but he is merely voicing what many are thinking.

In our press ‘helicopter money’ is widely talked about as the next step — but only one that will be taken in extremis — just like QE before it. Helicopter money is when central banks print money for the government to spend as it chooses or transfers are simply made to individuals to spend, typically within a specified time frame so the money cannot be saved. There are recent precedents. In 1999 Japan gifted shopping coupons with a six month life to families and the elderly and in 2008 US taxpayers received a one-off gratuitous rebate of $300.

I think this begs two important questions. The first was prompted by Mario Draghi in 2012 when he prefaced his remarks with ‘within our remit’: Just how far does the remit of a central banker go? Is it continuously assessed, and if so by whom and why don’t we hear or see evidence of it? I ask this question because in many ways they now appear to be acting as unelected governments, determining — not just implementing — economic policy, often seemingly and regrettably on the hoof.

The second question is why will helicopter money work after zero and now negative interest rates combined with QE have been insufficient to cure our perceived economic ills and may even, as some commentators suggest, be storing up yet more trouble for the future? Why will it not be just another short-term boost that fades with time leaving us back where we were but with even more debts created by fiat money?

Financial markets have placed huge confidence in the ability of central bankers to ‘do what it takes’. With fading global growth, government bond yields already low or negative, even in high debtor nations like Greece, and equity valuations at the upper end of their historic levels, a pretty big rabbit is going to have to come out of someone’s hat sometime soon.

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Welcome to my website. I'm Gregor Logan, an independent management professional with over 35 years of experience in all asset classes, including equities, bonds, property, private equity, alternative assets and bonds. I previously held senior-level roles at MGM Assurance, Pavilion Asset Management and New Star Asset Management.